From Briefing.com: 4:50 pm Weekly Wrap
The stock market held up well this week considering the interest rate situation. On Tuesday, the Fed raised the fed funds rate target from 4.50% to 4.75%. Over the past week, the 10-year yield rose from 4.67% to 4.85%. Yet, despite the increase in interest rates across the yield curve, the S&P only lost 8 points on the week.
The big event by far was the Fed policy statement on Tuesday. The increase in the fed funds rate was fully anticipated. The policy statement proved a disappointment.
There had been much anticipation that the statement would reflect a less aggressive posture on the part of the Fed. There was even some hope that it would suggest that the Fed was done raising short-term rates.
That was not the case. The policy statement was essentially unchanged from the previous statement. The conclusion was that another rate hike was nearly certain at the May 10 meeting, and that a further rate hike after that is probably in the cards as well.
The statement reflected a concern about continued strength in the economy, noting that "possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."
This reflects a concern that strong labor market conditions will lead to wage rates rising at a fast pace, and that high capacity utilization rates in manufacturing will lead to price increases as well.
The other major news this week was the continuing problems in the auto industry. On Friday, auto part maker Delphi announced it would close plants, lay off workers, attempt to exit labor contracts, and drop some contracts. This added to talk that General Motors might have to declare bankruptcy. It also followed news on Wednesday that GM said that GMAC financial information needed to be restated.
There was not much other news. The only economic releases of note this week included the modest revision to fourth quarter real GDP growth to a 1.7% annual rate from a previously reported 1.6% rate, and a core PCE deflator gain of 0.1% for February that left the year-over-year growth unchanged from January at 1.8%.
New claims for unemployment, consumer confidence, and a regional manufacturing survey were all strong. The economy is widely perceived to still be growing at a strong pace.
There were few earnings reports of note. Walgreen missed by a bit. Tiffany, Accenture, and Ruby Tuesday all had good reports, but there was no broad conclusion to draw on the earnings front.
The absence of earnings warnings as the quarter drew to a close was more noteworthy. That suggests first quarter earnings reports, due to start coming out in a couple of weeks, could be good.
Oil prices were up the past week to $66.63 a barrel from about $64 last week. The stock market showed little correlation to the daily fluctuations or the overall modest uptrend.
Interest rates remain a key variable for the stock market. The market has been able to ignore the rate concerns reasonably well, but if the 10-year yield starts approaching 5.00%, additional underlying nervousness could be evident.
Index Started Week Ended Week Change % Change YTD
DJIA 11279.97 11109.32 -170.65 -1.5 % 3.7 %
Nasdaq 2312.82 2339.79 26.97 1.2 % 6.1 %
S&P 500 1302.95 1294.83 -8.12 -0.6 % 3.7 %
Russell 2000 753.83 765.14 11.31 1.5 %13.7 %
4:20 pm : Like yesterday, the major averages attempted to advance. Again, though, attention was fixed on the Treasury market, and bond yields stifled the stock market's upward efforts.
Yesterday, the equity market finally responded to the upward push in bond yields. Conditions did not worsen today, nor did they really improve. Over the course of the week, the yield on the benchmark 10-year note went from 4.67% (last Friday) to 4.85%. That still leaves it at a 21-month high. The 4.9% on the 30-year, meanwhile, is a yield that that note hasn't seen in about a year. In the early going, Treasuries started to recover a bit. But the attempt was short-lived, and with its return to unchanged territory came the stock market's decline. Lately, the stock market has been impressively resilient to rising interest rates. It could not continue to turn a blind eye to them though, and action over the last two sessions shows that Treasuries are back in the spotlight.
Anticipation ahead of next week's economic calendar, which features the closely-watched March Employment Report, contributed to the bond market's passive stance. Mindful that Fed policy will continue to be data-dependent, the economic front remains in focus. There were a few items on today's calendar, but none had much market-moving impact. The core PCE was relatively in-line with expectations and did not change the current trend, Personal Income and Spending reports brought no surprise, and the Chicago PMI reading was no diversion in the regional manufacturing trend.
The corporate front did not provide much of a trading catalyst, either. General Motors (GM 21.27 +0.21) occupied the headlines again. Concerns that voided union contracts at supplier Delphi will lead to a strike sparked early selling, but the stock recovered and really did not have a big effect today. Still, the Discretionary sector closed 0.4% lower. It and other especially rate-sensitive areas faced selling pressure. Homebuilders were a weak spot, the Utilities sector fell 0.7%. The Financial sector also declined. It did demonstrate some resilience, but ultimately could not sustain a gain. Its intra-day reversal left the market without leadership.
The Energy and Materials sectors were the worst-faring. After surging recently, energy prices gave back some ground. Crude retreated from its eight-week high, but its move was not all that impressive, given the fact that it remained at $66.50 per barrel. The equity market didn't take much notice to falling energy prices, however; interest rate trends remained the driving force. Also, ongoing concerns over Iran helped temper enthusiasm that the price declines could have sparked. Conversely, the Energy sector (-1.1%) was one area of the market that did take note. The price action prompted some market-dragging profit-taking. The same thing happened within Materials (-0.7%). Several metals hit or approached historic highs this week, and pullbacks gave traders a reason to secure some recent returns across that sector.
Technology (-0.5%) was an additional factor behind the market's decline. Semiconductors had a volatile week, and the industry's drop today helped submerge the sector and stunt the Nasdaq. On a separate but related note, Google (GOOG 390.00 +1.56) received some added attention today. After the bell rang, the stock officially became a member of the S&P 500. Volume was nearly twice as much as usual, as index fund managers had to add the stock to their portfolios, but the stock's price was little changed. DJ30 -41.38 NASDAQ -1.03 SP500 -5.42 NASDAQ Dec/Adv/Vol 1193/1889/1.90 bln NYSE Dec/Adv/Vol 1579/1674/1.61 bln
09:32 am Merix: Needham & Co reiterates Buy. Target $10 to $15. Firm is saying that with solid progress on integrating E.P.C. and positive industry fundamentals co should continue to show improving earnings results in the coming quarters.
09:31 am Nuance Communications: Needham & Co reiterates Buy. Target $12 to $14. Firm ups target following a meeting with mgmt. They say mgmt's discussion of its markets, product lines and market position increased their confidence in unchanged estimates that have Nuance at the beginning of several years of 20% organic revenue growth with moderately rising operating margins.
09:30 am Genesis Microchip: CIBC Wrld Mkts reiterates Sector Outperform. Target $24 to $21. Firm cuts target following preannounced F4Q06 (March) results. Although the shortfall is annoying and reputation-damaging, they still consider GNSS a viable, inexpensive No. 2 trade on CY06 LCD-TV trends. They say the shortfall was attributed to soft D-CRT demand in China, LCD-TV seasonality in Europe, and poor Cortez Advanced yields. While yield issue is resolved, June Q gross margins will be penalized. They believe the soft pockets are merely seasonal blips, in what should be a robust year for D.T.V..
09:29 am Audiocodes: Nollenberger Capital initiates Buy. Target $18. Nollenberger initiates AUDC with a Buy and $18 tgt, saying they believe the current valuation offers investors an opportunity to capitalize on the co's recent design wins with several major O.E.M. customers as well as potential accelerated growth during 2H06 and well into 2007.
09:28 am Akamai Tech: Prudential reiterates Neutral. Target $27 to $30. Prudential expects another strong quarter out of Akamai driven by high levels of media traffic, particularly video. Firm raises their 1QE revenue and EPS ex-option expense to $87.1 mln and $0.17 (consensus is for $85.3 mln and $0.16) and their 2006E revenues and EPS ests to $371 mln and $0.73 (consensus is for $363.9 mln and $0.71). Given higher demand they are slightly increasing their capex forecast to 14% of revenue, putting some downward pressure on free cash flow. Despite continued strong business trends, they believe the stock has gotten ahead of itself.
09:26 am Merit Medical: CL King downgrades Strong Buy to Neutral. Target $17 to $12. Firm is also lowering their EPS estimate significantly and their confidence in the co's growth potential over the next two years is significantly diminished. Firm cuts their 2006 est to $0.43 from $0.62 (consensus $0.64) and cuts their 2007 est to $0.58 from $0.85 (consensus $0.83). Firm is reducing estimates because they are lowering our operating profit margin assumptions for 2006 and 2007. Their best estimate is that the stock will probably trade in a range of $10-$12 over the next few months.
09:25 am Bank of NY: RBC Capital Mkts reiterates Sector Perform. Target $31 to $34. Firm is saying that the market would view a sale of its retail branches as favorable as the Co would exit the low return retail business and presumably reinvest the proceeds from the sale in a faster growing and more profitable fee-based businesses.
09:23 am ATI Tech: RBC Capital Mkts reiterates Outperform. Target $19 to $23. Firm ups target following Q2 results. Firm sees several drivers, including the PC product ramp (particular recovery in high-end desktop market share), strengthening chipset business (with much-improved margins looking into 2H06 and beyond), continued growth in the higher-margin Consumer business, and positive bottom-line impact from the Xbox 360 rollout.
11:42 am Mohawk Industries (MHK)
82.49 -2.83: Mohawk Industries on Thursday lowered its first quarter earnings guidance due to higher than expected inventory accounting charges and softer sales growth in its core carpets business. The Calhoun, Georgia-based flooring manufacturer now expects earnings of $1.03 to $1.05 per share, down from its previous range of $1.17 to $1.26 per share. Analysts on average were looking for earnings of $1.22 per share, according to Reuters Estimates.
With respect to its earnings revision, Mohawk said a LIFO inventory accounting charge for its Mohawk division is expected to be $13 to $15 million in the quarter compared to $6 million a year ago. The company added that while raw material and energy costs have moderated, the non-cash LIFO charges were the second highest in its history. The LIFO method of accounting for inventory assumes that the most recent goods purchased by the company are the ones that are sold first. In a stable cost environment, LIFO charges should diminish.
Additionally, Mohawk said sales in its Mohawk segment grew a weaker than expected 5%, due to soft retail replacement business, the company's largest channel in the carpet category. As a result of slower industry sales, it also said it saw more pricing pressure on some opening price products and a higher level of promotional activity. While the commercial channel is expected to continue its positive trends, residential flooring sales for new construction should slow later this year as the housing market continues to correct itself amid rising interest rates, the company noted.
--Richard Jahnke, Briefing.com
11:36 am General Motors (GM)
20.70 -0.36: Earlier today auto parts supplier Delphi Corp. outlined a transformation plan that conveyed the actions it deems are necessary to emerge from Chapter 11 during the first half of 2007. For companies in bankruptcy, these types of "transformation plans" don't always get as much attention, but in this case, Delphi's action is of the utmost importance since it stirs concerns that General Motors (GM) could ultimately be forced into bankruptcy itself in the event the UAW goes on strike at Delphi to protest the company's restructuring plan.
At the crux of the matter for the UAW is Delphi's motions to have a bankruptcy judge void current labor union contracts and to modify retiree benefits, and to reject unprofitable supply contracts with GM. Delphi added that it expects to reduce its global salaried workforce by as many as 8,500 employees, or 25%, with up to 40% of corporate officer positions being eliminated. The company also said it will be necessary to freeze the current hourly U.S. pension plan as of October 1, 2006, and the current salaried pension plan as of January 1, 2007. The hourly plan for employees more than seven years from retirement and not covered by a GM benefit guarantee will be replaced with a defined contribution plan.
Although Delphi noted that the court filings were necessary to protect its business, the company said it has not left the negotiating table and that it has made considerable progress in recent weeks. The UAW, as one might expect, issued a terse statement decrying Delphi's action as a "misuse of the bankruptcy procedure to circumvent the collective bargaining process... [and that] Delphi's filing of its 1113/1114 motions kills that momentum." The UAW also asserted that if the union contracts are voided and Delphi imposes its last wage and benefit cut proposal, it appears that a long strike will be impossible to avoid.
The latter is hardly music to GM's ears, which said it is "disappointed" with Delphi's action, but not entirely surprised by it. GM pledged to continue to work to reach a consensual agreement that makes sense and is financially viable for all parties. A hearing on the motions won't take place until May 9-10 in order to allow for further negotiating. Notwithstanding reports GM is close to announcing the sale of a majority stake in GMAC, the uncertainty surrounding the Delphi-UAW conflict, and the possibility of a crippling strike, is reason alone to keep to the sidelines with GM's stock.
--Patrick J. O'Hare, Briefing.com
10:23 am Hansen Natural (HANS)
125.57 +6.47: Shares of Hansen Natural traded higher on Friday amid speculation that the company and Anheuser-Busch (BUD) are in discussions about a potential partnership. According to research firm Stifel Nicolaus, industry sources say the two companies are considering a possible distribution agreement, to partnering on an alcoholic drink, to an outright acquisition of Hansen by BUD.
Although an acquisition is not likely, Stifel said it was not out of the question. It did, however, note that a partnership on an alcoholic drink bearing the popular Monster name could make strategic sense for BUD, which has had limited success in the energy drink category. Furthermore, with consumer preferences shifting away from beer to substitutes like wine and vodka, and other alternative beverages, a partnership could help the company expand its product line and capitalize on the rapidly growing market for energy drinks.
Driven by its growing position in the energy drink market, Hansen has grown at a torrid pace in recent years. The company's Monster brand, which has become the No. 2 energy drink behind Red Bull, has fueled strong revenue and earnings growth and has helped energize its stock price. However, with the threat of new competitive pressures and the looming threat of Red Bull, investors have been concerned that the company's growth will ultimately slow from its fervent pace. With Monster sales accounting for roughly 80% of total revenues, a partnership with BUD will potentially help diversify its revenue stream and allow the company to leverage the beer maker's strong brand and market base.
--Richard Jahnke, Briefing.com
08:58 am LeapFrog Enterprises (LF)
10.76: LeapFrog Enterprises on Thursday said that a federal court in Delaware ruled against it in a patent suit against Fisher-Price, a subsidiary of Mattel Inc. (MAT). The asserted patent claim, which was found to be invalid, was filed in October 2003 and alleged that Fisher-Price's PowerTouch toy infringed LeapFrog's patent for its interactive books.
In response to the ruling, LeapFrog's chief executive, Tom Kalinske, said, "Technology-based patent litigation is very complex and challenging. Nonetheless, we will continue to defend our intellectual property rights in the future."
Neil Friedman, president of Mattel, in contrast, said, "As a company that invests significantly in the development of innovative products and intellectual property, we respect the intellectual property rights of others and conduct our business with the utmost integrity."
While the news is certainly a positive for Mattel, the lack of sales growth and visibility surrounding key product initiatives continues to cloud prospects. As such, we continue to favor rival toymaker Hasbro (HAS), given its strong fundamentals and attractive growth profile.
--Richard Jahnke, Briefing.com
08:28 am Restoration Hardware (RSTO)
5.75: Clearly in need of a restoration, the retailer Restoration Hardware reported a net loss in the fourth quarter after same-store sales slumped 5.5%. The company reported a loss of $19.5 mln, or 52 cents per share, in sharp contrast to a profit of $10.6 mln or 28 cents earned in the prior year. In January the company lowered guidance citing a higher percentage of furniture and direct-to-customer orders causing it to miss revenue targets. In the end, excluding a non-cash charge of $27.9 mln, per share profits of 22 cents came in-line with consensus estimate. Despite the in-line report, the lower earnings will likely weigh on shares in the near-term.
Not surprisingly, the company issued downside guidance for the first quarter. It anticipates a loss of 8-12 cents per share, excluding items, versus a consensus estimate of a loss of 5 cents per share, on revenue growth of 15-18%. The company also provided initial FY07 guidance, brightening the picture somewhat. Sales are expected to rise 18-22% to $686-$709.6 mln driven by positive comps in the low to mid single digit range and 35-40% growth in the direct-to-customer channel. Separately, chief executive officer John Tate, who has been on the job less than two years, announced his departure for personal reasons.
We remain Underweight the Consumer Discretionary sector given macro economic headwinds and premium multiple. We do however hold a favorable view of several retailers including Gap, Inc. (GPS) and Gymboree (GYMB).
--Kimberly DuBord, Briefing.com
07:17 am Genesis Microchip (GNSS)
18.52: Genesis Microchip, which makes chips used in digital TVs, flat panel displays, and DVD players and recorders, cut fourth quarter revenue guidance citing weaker than expected demand and heightened competition. The new top line forecast is $60-61 mln, down from its previous guidance of $62-$67 mln. The company, whose biggest customers include Philips Electronics and LG Electronics, blames the shortfall on weaker than expected demand for plat-panel television controllers in Europe ahead of the World Cup and digital CRT TV controllers in China.
The new guidance stands in contrast to the current consensus estimate of $65.3 mln. Additionally, a lower than expected yield on its newly launched TV controller chip products is factoring into weaker gross margin guidance, which was lowered to 43% from 46-48%. Genesis does expect Q4 operating expenses to remain in the previous range of $26.5-$28 mln. During its conference call, Genesis cited emerging Taiwanese competition and acknowledged at this point that it's unclear how much inventory is in the channel, which could have a more lasting impact on profitability.
The downdraft in guidance sent shares plummeting more than two dollars in the after-hours session. The consensus EPS estimate for Q4 is currently at $0.15 per share. While the company may be experiencing seasonal weakness raising expectations for the quarters ahead, the revision will likely weigh on shares in the near-term. The stock has come well off highs reached in the fall, but trades at an attractive forward multiple of 19.6x.
--Kimberly DuBord, Briefing.com
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